Credit card fraud

Credit card fraud is a wide-ranging term for theft and fraud committed using a credit card or any similar payment mechanism as a fraudulent source of funds in a transaction. The purpose may be to obtain goods without paying, or to obtain unauthorized funds from an account. Credit card fraud is also an adjunct to identity theft. According to the Federal Trade Commission, while identity theft had been holding steady for the last few years, it saw a 21 percent increase in 2008. However, credit card fraud, that crime which most people associate with ID theft, decreased as a percentage of all ID theft complaints for the sixth year in a row.

The cost of card fraud in 2006 were 7 cents per 100 dollars worth of transactions (7 basis points). Due to the high volume of transactions this translates to billions of dollars. In 2006, fraud in the United Kingdom alone was estimated at £535 million, or US$750–830 million at prevailing 2006 exchange rates.

Origins

The fraud begins with either the theft of the physical card or the compromise of data associated with the account, including the card account number or other information that would routinely and necessarily be available to a merchant during a legitimate transaction. The compromise can occur by many common routes and can usually be conducted without tipping off the card holder, the merchant or the issuer, at least until the account is ultimately used for fraud. A simple example is that of a store clerk copying sales receipts for later use. The rapid growth of credit card use on the Internet has made database security lapses particularly costly; in some cases, millions of accounts have been compromised.

Stolen cards can be reported quickly by cardholders, but a compromised account can be hoarded by a thief for weeks or months before any fraudulent use, making it difficult to identify the source of the compromise. The cardholder may not discover fraudulent use until receiving a billing statement, which may be delivered infrequently.

Stolen cards

When a credit card is lost or stolen, it remains usable until the holder notifies the issuer that the card is lost. Most issuers have free 24-hour telephone numbers to encourage prompt reporting. Still, it is possible for a thief to make unauthorized purchases on a card until it is canceled. Without other security measures, a thief could potentially purchase thousands of dollars in merchandise or services before the cardholder or the card issuer realize that the card is in the wrong hands.

The only common security measure on all cards is a signature panel, but signatures are relatively easy to forge. Some merchants will demand to see a picture ID, such as a driver's license, to verify the identity of the purchaser, and some credit cards include the holder's picture on the card itself. However, the card holder has a right to refuse to show additional verification, and asking for such verification is usually a violation of the merchant's agreement with the credit card companies. Self-serve payment systems (gas stations, kiosks, etc.) are common targets for stolen cards, as there is no way to verify the card holder's identity. A common countermeasure is to require the user to key in some identifying information, such as the user's ZIP or postal code. This method may deter casual theft of a card found alone, but if the card holder's wallet is stolen, it may be trivial for the thief to deduce the information by looking at other items in the wallet. For instance, a U.S. driver license commonly has the holder's home address and ZIP code printed on it.

Card issuers have several countermeasures, including sophisticated software that can, before a transaction is authorized, estimate the probability of fraud. For example, a large transaction occurring a great distance from the cardholder's home might seem suspicious. The merchant may be instructed to call the card issuer for verification, or to decline the transaction, or even to hold the card and refuse to return it to the customer. The customer must contact the issuer and prove who they are to get their card back (if it is not fraud and they are actually buying a product).

Compromised accounts

Card account information is stored in a number of formats. Account numbers are often embossed or imprinted on the card, and a magnetic stripe on the back contains the data in machine readable format. Fields can vary, but the most common include:

• Name of card holder
• Account number
• Expiration date
• Verification/CVV code

Card not Present

The mail and the Internet are major routes for fraud against merchants who sell and ship products, and impacts legitimate mail-order and Internet merchants. If the card is not physically present (called CNP Card Not Present) the merchant must rely on the holder (or someone purporting to be so) presenting the information indirectly, whether by mail, telephone or over the Internet. While there are safeguards to this, it is still more risky than presenting in person, and indeed card issuers tend to charge a greater transaction rate for CNP, because of the greater risk. To many people's surprise, telephone ordering is the most risky, far more risky than the Internet.

It is difficult for a merchant to verify that the actual cardholder is indeed authorising the purchase. Shipping companies can guarantee delivery to a location, but they are not required to check identification and they are usually not involved in processing payments for the merchandise. A common recent preventive measure for merchants is to allow shipment only to an address approved by the cardholder, and merchant banking systems offer simple methods of verifying this information. Before this and similar methods were introduced, mail order carding was rampant as early as 1992., using a method in which the carder obtains the credit card information for a local resident and intercepts expensive computer equipment he ordered using the stolen card and shipped to the address, often by staking out the porch of the residence.

Small transactions generally undergo less scrutiny, and are less likely to be investigated by either the card issuer or the merchant. CNP merchants must take extra precaution against fraud exposure and associated losses, and they pay higher rates for the privilege of accepting cards. Fraudsters bet on the fact that many fraud prevention features are not used for small transactions.

Merchant associations have developed some prevention measures, such as single use card numbers, but these have not met with much success. Customers expect to be able to use their credit card without any hassles, and have little incentive to pursue additional security due to laws limiting customer liability in the event of fraud. Merchants can implement these prevention measures but risk losing business if the customer chooses not to use the measures.

Identity theft

Identity theft can be divided into two broad categories: Application fraud and account takeover.

Application fraud

Application fraud happens when a criminal uses stolen or fake documents to open an account in someone else's name. Criminals may try to steal documents such as utility bills and bank statements to build up useful personal information. Or they may create counterfeit documents.

Account takeover

Account takeover happens when a criminal tries to take over another person's account, first by gathering information about the intended victim, then contacting their card issuer masquerading as the genuine cardholder, and asking for mail to be redirected to a new address. The criminal then reports the card lost and asks for a replacement to be sent.

Some merchants added a new practice to protect their consumers and their own reputation, where they ask the buyer to send a photocopy of the physical card and statement to ensure the legitimate usage of a card.

Skimming

Skimming is the theft of credit card information used in an otherwise legitimate transaction. It is typically an "inside job" by a dishonest employee of a legitimate merchant. The thief can procure a victim’s credit card number using basic methods such as photocopying receipts or more advanced methods such as using a small electronic device (skimmer) to swipe and store hundreds of victims’ credit card numbers. Common scenarios for skimming are restaurants or bars where the skimmer has possession of the victim's credit card out of their immediate view. The thief may also use a small keypad to unobtrusively transcribe the 3 or 4 digit Card Security Code which is not present on the magnetic strip.

Instances of skimming have been reported where the perpetrator has put a device over the card slot of a ATM (automated teller machine), which reads the magnetic strip as the user unknowingly passes their card through it. These devices are often used in conjunction with a pinhole camera to read the user's PIN at the same time. This method is being used very frequently in Europe, e.g. in the Netherlands. Another technique used is a keypad overlay that matches up with the buttons of the legitimate keypad below it and presses them when operated, but records or transmits the keylog of the PIN number entered by wireless. The device or group of devices illicitly installed on an ATM are also colloquially known as a "skimmer". Recently-made ATMs now often run a picture of what the slot and keypad are supposed to look like as a background, so that consumers can identify foreign devices attached.

Skimming is difficult for the typical cardholder to detect, but given a large enough sample, it is fairly easy for the card issuer to detect. The issuer collects a list of all the cardholders who have complained about fraudulent transactions, and then uses data mining to discover relationships among them and the merchants they use. For example, if many of the cardholders use a particular merchant, that merchant can be directly investigated. Sophisticated algorithms can also search for patterns of fraud. Merchants must ensure the physical security of their terminals, and penalties for merchants can be severe if they are compromised, ranging from large fines by the issuer to complete exclusion from the system, which can be a death blow to businesses such as restaurants where credit card transactions are the norm.

Carding

Carding is a term used for a process to verify the validity of stolen card data. The thief presents the card information on a website that has real-time transaction processing. If the card is processed successfully, the thief knows that the card is still good. The specific item purchased is immaterial, and the thief does not need to purchase an actual product; a Web site subscription or charitable donation would be sufficient. The purchase is usually for a small monetary amount, both to avoid using the card's credit limit, and also to avoid attracting the card issuer's attention. A website known to be susceptible to carding is known as a cardable website.

In the past, carders used computer programs called "generators" to produce a sequence of credit card numbers, and then test them to see which were valid accounts. Another variation would be to take false card numbers to a location that does not immediately process card numbers, such as a trade show or special event. However, this process is no longer viable due to widespread requirement by Internet credit card processing systems for additional data such as the billing address, the 3 to 4 digit Card Security Code and/or the card's expiration date, as well as the more prevalent use of wireless card scanners that can process transactions right away. Nowadays, carding is more typically used to verify credit card data obtained directly from the victims by skimming or phishing.

A set of credit card details that has been verified in this way is known in fraud circles as a phish. A carder will typically sell data files of the phish to other individuals who will carry out the actual fraud. Market price for a phish ranges from US$1.00 to US$50.00 depending on the type of card, freshness of the data and credit status of the victim.

BIN attack

Credit cards are produced in BIN ranges. Where an issuer does not use random generation of the card number, it is possible for an attacker to obtain one good card number and generate valid card numbers by changing the last four numbers using a generator. The expiry date of these cards would most likely be the same as the good card.

Profits, losses and punishment

United States

Cardholder liability

In the US, federal law limits the liability of card holders to $50 in the event of theft of the actual credit card, regardless of the amount charged on the card, if reported within 60 days of receiving the statement. In practice many issuers will waive this small payment and simply remove the fraudulent charges from the customer's account if the customer signs an affidavit confirming that the charges are indeed fraudulent. If the physical card is not lost or stolen, but rather just the credit card account number itself is stolen, then Federal Law guarantees card holders have zero liability to the credit card issuer.

Merchants

The merchant bears the loss. The merchant loses the value of any goods or services sold, and any associated fees. These losses incline merchants to be cautious and often they ban legitimate transactions and lose potential revenues. Online merchants can choose to apply for additional services that credit card companies offer, such as Verified by Visa and MasterCard SecureCode. However, these are fiddly for consumers so there is a trade-off of making a sale easy and making it secure.

The liability for fraud lies on the merchant, not the credit card company. The merchant must pay the full cost of the fraud plus a chargeback fee (unless the merchant's chargeback insurance covers it).

High-risk industries such as online shops anticipate losses and spread them over the prices that are paid by honest buyers. The FBI's Financial Report to the Public in 2007 estimated such losses to be $52.6 billion that are borne by 9.91 million US consumers. Recently several attempts have been made to amend the legislation to protect cardholders and merchants from fraud, but credit card companies are heavily resistant to such initiatives.

United Kingdom

In the UK, credit cards are regulated by the Consumer Credit Act 1974 (amended 2006). This provides a number of protections and requirements.

Both the merchant and the credit company are jointly and severally liable for the sale. If there is any fault, the cardholder can go to either. In practice, this means that most card issuers automatically provide protection against faulty sales and will chase up merchants that sell faulty goods (indeed, will remove their facility if it is habitual).

In the UK, an offered price (either standard or discounted) is an invitation to treat. There is no obligation on either side to accept the offer, or indeed give or take it at that price. Disputes can arise where an advertised price is different from the actual price charged.

Any misuse of the card, unless deliberately criminal, must be refunded by the merchant or card issuer.

Distance Selling Regulations require goods ordered by 'phone, Internet or mail order to be delivered to the cardholder's address. There is also a 7-day "cooling off period" where they can be returned without charge. The aim is more to protect people from mis-selling, but it also helps protect against fraud.

Credit card companies

To prevent being "charged back" for fraud transactions Merchants can sign up for services offered by Visa and Mastercard called Verified by visa and MasterCard SecureCode. This requires consumers to add additional information to confirm a transaction.

Often enough online merchants do not take adequate measures to protect their websites from fraud attacks, for example by being blind to sequencing. In contrast to more automated product transactions, a clerk overseeing "card present" authorization requests must approve the customer's removal of the goods from the premise in real time.

Credit card merchant associations, like Visa and MasterCard, receive profit from transaction fees, charging between 0% and 3.25% of the purchase price plus a per transaction fee of between 0.00 USD and 40.00 USD. Cash costs more to bank up, so it is worthwhile for merchants to take cards. Issuers are thus motivated to pursue policies which increase the money transferred by their systems. Many merchants believe this pursuit of revenue reduces the incentive for credit card issuers to adopt procedures to reduce crime, particularly because the cost of investigating a fraud is usually higher than the cost of just writing it off. But in the US credit card issuers do not take these costs; they are passed on to the merchants as "chargebacks". This can results in substantial additional costs: not only has the merchant been defrauded for the amount of the transaction, he is also obliged to pay the chargeback fee, and to add insult to injury the transaction fees still stand.

Merchants have started to request changes in state and federal laws to protect themselves and their consumers from fraud, but the credit card industry has opposed many of the requests. In many cases, merchants have little ability to fight fraud, and must simply accept a proportion of fraud as a cost of doing business.

Because all card-accepting merchants and card-carrying customers are bound by civil contract law there are few criminal laws covering the fraud. Payment transfer associations enact changes to regulations, and the three parties— the issuer, the consumer, and the merchant— are all generally bound to the conditions, by a self-acceptance term in the contract that it can be changed.

Merchants

The merchant loses the goods or services sold, the payment, the fees for processing the payment, any currency conversion commissions, and the amount of the chargeback penalty. For obvious reasons, many merchants take steps to avoid chargebacks—such as not accepting suspicious transactions. This may spawn collateral damage, where the merchant additionally loses legitimate sales by incorrectly blocking legitimate transactions.

Famous credit fraud attacks

Between July 2005 and mid-January 2007 a breach of systems at TJX Companies exposed data from more than 45.6 million credit cards. Albert Gonzalez is accused of being the ringleader of the group responsible for the thefts.

In August 2009 Gonzalez was also indicted for the biggest known credit card theft to date — information from more than 130 million credit and debit cards was stolen at Heartland Payment Systems, retailers 7-Eleven and Hannaford Brothers, and two unidentified companies.

See also

• Chargeback insurance
• Credit card hijacking
• Financial crimes
• Friendly Fraud
• Identity theft
• Internet fraud
• Phishing
• Predictive analytics
• Traffic analysis
• White Collar Crime
• International credit card data theft

External links

• Fraud Control Basics Visa™ Fraud Control Training
• Merchant Training MasterCard™ Merchant Support
• The Internet Crime Complaint Center (IC3) is a partnership between the Federal Bureau of Investigation (FBI) and the National White Collar Crime Center (NW3C).
• Security and your Credit Card at Simon Fraser University
• Internet Fraud, with a section "Avoiding Credit Card Fraud", at the Federal Bureau of Investigation website
• Counterfeiting and Credit Card Fraud at the Royal Canadian Mounted Police website
• Avoiding Credit and Charge Card Fraud at US Federal Trade Commission
• Credit Card Fraud: Prevention and Cures Idaho Office of Attorney General